XN000022-1996-04-03 — Page 19

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Fiscal Reserves

My second general point concerns our fiscal reserves. Some members have urged us to use our reserves to boost spending. The Secretary for the Treasury has explained how the increase in government expenditure has matched economic growth over the last six years since we started the current planning cycle. Any use of our reserves to boost spending further would inevitably mean that government expenditure would be growing at a rate faster than the economy, thus breaching our long- established budgetary guideline. It would also mean another deficit budget for 1996- 97, following a small one in 1995-96.

Since becoming Financial Secretary, I have clearly stated on several occasions a.y firm commitment to maintaining tight control of government spending. I want to repeat that commitment again today. We must not allow government spending to grow disproportionately and, as a result, deprive the private sector of the resources required to fuel our economic growth. To do so would put at risk our future growth prospects. It would also risk reversing the welcome and continuing reduction in inflation which we anticipate. I hope Members agree that these are, quite simply, unacceptable risks.

I said in my Budget Speech that the appropriate level of reserves, over the long term. could be a matter of debate. But, I repeat, this is not the time to reduce the cushion provided by these reserves. Maintaining confidence, both locally and internationally, in the soundness of our financial system is of paramount importance in the remaining months before the birth of the SARG. Let me emphasise this point. I believe that our strong fiscal reserves and our prudent approach to the management of Hong Kong's public finances have been fundamental to the stability of our financial system. I am not prepared to try any new approaches or take any risks which might undermine our financial system or our economic competitiveness. I may be labouring the point, but I feel very strongly that Hong Kong's future success depends above all on sticking to the economic and financial principles which have brought us our past

success.

Our prudent approach to the management of our public finances carries over into the management of the fiscal reserves. It is true, as one member stated, that our management is conservative, and that the Exchange Fund normally achieves a higher rate of return. However the risk profile of our liscal reserves is significantly different. The fiscal reserves are immune to exchange rate and other risks as far as possible, and the yields obtained are primarily determined by the prevailing interest rates. My priority is to ensure that the reserves are safe and invested in a way that strengthens the Hong Kong dollar. The return we have achieved is quite satisfactory given the constraints under which we choose to operate.